Revelers had good reason to sing "Auld Lang Syne" this New Year's. In 1997, nearly every industry reaped the benefits of a roaring economy-but the outlook for 1998 is considerably less ebullient. It's shaping up to be a good year for airplane builders and a not-so-good one for bankers and auto makers. Software companies will be desperate for skilled workers in 1998, while steelmakers will cut jobs. Retailers will have a tough time prying dollars out of consumers' wallets despite the economy's continued growth. The Asian financial crisis will hurt some computer makers, farmers, and brokerages in the new year while leaving many sectors of U.S. industry unscathed.

Those are a few of the highlights and lowlights of BUSINESS WEEK's annual Industry Outlook, with closeups of 21 industries that will be crucial to this year's performance. In general, look for a U.S. economy that comes back to earth after an astounding 1997, in which inflation-adjusted output grew an estimated 3.7%. This year, growth will fall to a more sustainable 2% to 3%, most forecasters say.

Slower growth will take some of the pressure off tight labor markets and reduce the chance of a surge in inflation. But it will also hurt profits. Standard & Poor's DRI--a unit of BUSINESS WEEK's publisher, The McGraw-Hill Companies--provided the numbers that underlie this outlook. It is projecting about 3.1% growth in earnings per share for companies in the Standard & Poor's 500-stock index. That's down from 9.3% in 1997--and 40% as recently as 1994.

The biggest swing factor from 1997 to 1998 will be trade. Financial upheavals in Thailand, Korea, and other nations in the region have slowed Asia's economies and caused currencies to plummet. The strengthening of the dollar as a refuge currency will discourage exports and encourage imports. A wider trade deficit will slow the U.S. economy.

ASIAN DRAG. Steelmakers and auto makers in particular will feel the heat from Asian competitors with cheap currencies. Korean steel, for instance, has become dirt cheap because of the won's collapse. That only adds to the woes of U.S. steelmakers suffering because of cheap imports. Detroit, meanwhile, will have to continue and even expand profit-draining sales incentives in 1998 to stave off Japanese carmakers. Ford Motor Co. Chairman Alexander J. Trotman says, in a model of understatement, that the weakness of Japan's yen will "exert increased pressure on us from Japan exports." It will also cut Ford's sales in Japan, he noted at a December news conference: "We are shipping vehicles, and the profit numbers do not look pretty, to put it mildly."

But there's a brighter side to the trade picture. The U.S. is somewhat insulated from Asia's financial crisis because it has few loans to the region. Only one U.S. bank, Citicorp, gets as much as a fifth of its operating income from the region.

What's more, though Asian economies won't fly as high as they usually do, those outside Japan will still outperform the U.S. in 1998, with growth of about 3.4% (table, page 81). The dollar is also likely to fall a bit in 1998 on a trade-weighted basis as Asia gets back on its feet. Exports from the U.S. will grow 4%, faster than the overall U.S. economy, estimates Standard & Poor's DRI. Boeing Co., for one, is looking to go gangbusters this year, thanks to a big backlog of orders from Asia, Europe, and the U.S. And Morristown (N.J.)'s AlliedSignal Inc. sells just over 40% of its products outside the U.S.--turbochargers for European cars, for instance. "We see 1998 as a good year, not a blowout year," says Chief Financial Officer Richard F. Wallman.

With inflation so low, companies won't have an opportunity to raise profits by raising prices. Luckily, for some products and services, they can cut prices and still see profits climb as volumes soar. Personal-computer makers have found that the more they discount, the more they sell. PCs priced below $1,000 were 22% of the U.S. retail market in 1997 and could hit 33% this year, says Dataquest Inc. The same goes for long-distance calls: With prices falling, revenue is forecast to rise 9% this year.

But industries that aren't blessed with such marvelous elasticity of demand have to find other ways to cope with low-single-digit inflation. Expect another year of mergers, restructurings, and downsizings, even at companies that are in perfectly good health. Take Boeing: In spite of its full order book, the company announced in December that it has improved efficiency enough to cut 12,000 jobs, mostly through attrition, in the second half of 1998. Likewise, the defense-and-aerospace industry will continue to wring efficiencies out of mergers in 1998. Expect more job cuts after Lockheed Martin Corp. and Northrop Grumman Corp. complete their $11.6 billion merger in the first quarter.

Merger mania hasn't run its course either. Most telecommunications-industry execs predict more big phone company combinations on the heels of WorldCom Inc.'s record-breaking $37 billion bid for MCI Communications Corp. Mergers of accounting and consulting firms are putting increasing pressure on second-tier firms.

M&A BACKLASH? Countering the trend toward bigness, there may be an official reaction against it in 1998. Members of Congress and antitrust regulators are turning up the heat on powerful players ranging from Microsoft to the big airlines to Union Pacific, the railroad whose megamerger with Southern Pacific Rail led to severe service problems for much of 1997.

Meanwhile, the outlook is dependent on the vagaries of several unreliable factors--chief among them the stock market. If equities tumble because of the earnings-growth slowdown, consumers could lose confidence and cut back spending, thus putting the brakes on the economy.

On that score, there's mounting evidence of a dangerous bifurcation among American consumers. Upper-income households still have money to burn: Tiffany & Co., for example, plans to open stores in Denver, Seattle, and Las Vegas this year. But overall, retailers are having a hard time moving their goods. Retail sales, adjusted for inflation, are likely to rise only about 2% in 1998, says the Commerce Dept. That's down from a 4% annual rate in the early 1990s.

One reason is that many people are maxed out on credit. The personal savings rate, averaging 3.8% of disposable income through the first 11 months of 1997, was on track to be the lowest of the past half-century, notes the Levy Institute Forecasting Center in Mount Kisco, N.Y. "Presently, there seem to be three major sectors in the market for consumer credit: those who don't need it, those who don't want it, and those who can't have it," say the Levy Institute's economists.

There's another explanation for torpid retail sales: It's more a lack of time than a lack of money. In 1998, the game will be capturing the attention of distracted consumers. Remember when there were three television networks? This year, there will be eight. Supermarkets, in a bid to capture business from restaurants and take-out delis, are pushing to increase sales of time-saving prepared foods by about 15% this year, says one consultant. "Extra income is going to trips, going to entertainment, going to all kinds of experiences, and that makes for stiff competition for traditional retailers," says Wendy Liebmann, president of WSL Strategic Retail, a New York-based consulting firm.

Success in keeping wages in check will determine the outlook for many industries. Labor, not industrial capacity, has become the key choke point in the economy. In November, the unemployment rate fell to 4.6%, the lowest since 1973, even though a record 67.1% of Americans are participating in the labor force, either employed or looking for work.

The downside: There could be a labor-led resurgence in inflation. In the past year, wages have risen faster than the consumer price index. Overall employment costs have remained under control because of decreases in costs of benefits, but that's likely to change as health insurers raise premiums to restore profit margins. "Like it or not, labor is on the ascendancy," says Stephen S. Roach, chief economist at Morgan Stanley, Dean Witter, Discover & Co.

TETHERED INFLATION. Labor's power stems from the fact that good help is harder to find. The National Association of Manufacturers recently reported that nearly 9 out of 10 U.S. manufacturers are complaining of a lack of qualified workers in highly skilled occupations. "The cry of every employer is: `I need people whose skills are better matched with our needs,"' says Mitchell S. Fromstein, chairman of Manpower Inc., the temporary-help provider.

But with job growth projected to slow down in 1998, wage growth should remain under control. Even before the slowdown hit, employers have been sensible about restraining pay. "It's doubtful that companies have granted wage increases that would threaten their bottom line," says James E. Glassman, senior U.S. economist for the Chase Securities Inc. unit of Chase Manhattan Corp. Case in point: Continental Airlines Inc. has reached a tentative deal to raise pilot pay 45% over two years. But Continental President Gregory D. Brenneman says the airline can pay for the hike in part by getting new, more fuel-efficient planes, refinancing planes at lower rates, consolidating 92 different health plans, and cutting ticket-distribution costs via electronic ticketing.

Because inflation remains in check, interest rates should stay low in 1998. That's good for companies with big borrowing costs, such as electric utilities. The Standard & Poor's utilities index has risen in lockstep with the fall in bond yields over the past couple of years. Public Service Enterprise Group Inc., a Newark (N.J.) utility-holding company, has managed to reduce borrowing costs about 20% through lower interest rates since the early 1990s, says Chairman E. James Ferland.

One reason the current economic expansion has lasted since 1991 is that it has become, to some degree, self-regulating. As soon as it begins to overheat, interest rates rise to cool things off. Investors wisely back off from projects that don't stand a good chance of earning a reasonable return. Thank financial deregulation and innovation for aiding that process. For example, real estate professionals say that real estate investment trusts have restrained the overbuilding that has long plagued the construction business--and caused repercussions in the overall economy.

That's not to say cowboy capitalism has disappeared--thankfully. In the semiconductor business, companies have learned that a seemingly prudent decision to refrain from investing in the latest generation of fabrication plants can leave you permanently out of the action. "It's like recovering from a spinout in a Porsche," says G. Dan Hutcheson, president of market watcher VLSI Research Inc. "The solution isn't to hit the brakes but to accelerate more."

So how does it all add up? Standard & Poor's DRI has a chillier perspective than most. It says that inflation-adjusted output will be just 2.0% higher in 1998 as a whole than in 1997, largely because of a widening of the trade deficit. Also holding things back, says S&P DRI, will be a small dip in the growth rate of consumer spending, a decrease in inventory accumulation, and a decline in the growth of business investment (charts). "You just can't have another year like 1997 this late in an expansion," says David A. Wyss, chief economist for Standard & Poor's DRI.

BEGGING TO DIFFER. The official BUSINESS WEEK forecast for 1998 (Dec. 29) is quite a bit rosier, projecting 3% growth for the full year compared with 1997. Using a different yardstick--namely, a comparison of the fourth-quarter 1998 rate of output with the fourth-quarter 1997 rate, rather than the year-to-year figures--BUSINESS WEEK projects 2.4% growth, while Standard & Poor's DRI predicts just 1.5% growth. BUSINESS WEEK's forecasters, James C. Cooper and Kathleen Madigan, see a slowdown occurring later rather than sooner because they expect strong demand to sustain the economy's momentum until well into 1998.

If middling growth this year sounds unappealing, remember that the economy is already cruising at a high level of performance. The misery index--i.e., the inflation rate plus the unemployment rate--is at its lowest level since 1967. What's more, modest growth is better than the alternative: a boom followed quickly by a bust. There has been only one recession since 1982, and it was mild: the short-lived downturn of 1990-1991.

Just when white-hot labor markets threatened to set off an inflationary spiral, along came Asia's deflationary financial crisis to cool things off. The U.S. economy in 1998 will be a little like the man with his head in an oven and his feet in a refrigerator: on average, just about right.

    Before it's here, it's on the Bloomberg Terminal.